Introduction
In this assignment managerial accounting will be applied through comparative and ratio analysis to identify financial data that managers need to make decisions. In this scenario, the role of a loan officer for the White Sands Bank of Taos is being used. The president of P. Jason Corporation wants an 8-year loan for the expansion of the operations of his company. The funds will be used to buy new equipment. More information is needed such as financial statements that have been audited but for now to prove the company’s debt-worthiness the following information for the company was provided: the current ratio in 2016 was 2.1 and 3.1 in 2017. The asset turnover was 2.2 in 2016 and 2.8 in 2017. The net income was down 8 percent in 2016 and up 32 percent in 2017. The earnings per share was $2.50 in 2016 and $3.30 in 2017.
Why Financial Statements Should Be Audited
A loan officer can request additional information from a company to accurately make a decision on whether to grant them a loan. The financial statements should be audited because balance sheet and annual reports need to be evaluated. This will ensure a fair decision is made based on detailed financial information about a company. Also audited documents are authentic, whereas other documents can be altered to falsely display information that will make the company look like it is in healthy condition.
Implications of the Ratios
The ratios provided by the president P. Jason Corporation are relevant because they will impact the decision to grant them a loan. All of the current ratios are higher than the previous year. The current ratio for the company is 3.1 which is consider to be high. This indicates that the company has the ability to pay off the 8-year loan on time. Also, since the ratio increased from last year it shows solvency improvement in the company. The asset turnover displays how fast the company’s assets can turn into revenue. The asset turnover for P. Jason Corporation is currently 2.8 which shows a steady increase in the company’s assets which helps their chances of getting approved for a loan. The company’s earnings per share are 3.30 which shows profitability. The ratios paint a favorable picture of P. Jason Corporation.
Trends in the Performance
The net income for P. Jason Corporation drastically improved in 2017 which is favorable because it shows that the company is earning more revenue than it is paying out. The earnings per share show profitability for shareholders, which is also favorable. The current ratio is high and favorable because it indicates that the likeness of debt being paid is guaranteed. The asset turnover is favorable because the company is efficient in using assets to create revenue. This shows how much money in sales the company generates for the money invested in assets.
Other Ratios
Three other ratios that can be calculated for P. Jason Corporation are return on asset, leverage, and debt. The return on asset ratio should be used because it indicates how profitable the company is in relation to their total assets. The leverage ratio should be used because it shows the amount of capital the company has that is debt and it shows their ability to fulfill financial obligations. The debt ratio should be used because it shows what portions of the assets in the company are financed by debt and shows how the company will pay back the loan. High debt ratio equals high risks.
Better Understanding of Financial Picture
To gain a better understanding as a loan officer additional documents like the income statement, cash flow statement and balance sheet would be needed. At least 2 years of these documents would be requested to help understand the financial direction P. Jason Corporation is going in and determine future finances and trends of the company by analyzing many things such as assets, liabilities, revenue, equity and etc.
Recommendation and Conclusion
Based on the preliminary information provided by P. Jason Corporation the recommendation is that the loan should be granted. The decision is because the company shows an increase in all the ratios from 2016 to 2017. However, the ratios are not enough to make an informed and accurate decision. The loan may not be for a full 8 years like the company is seeking because all of the financial information requested is not yet provided. To be considered for the full 8-year loan the audited financial documents will need to be provided in a timely manner.
References
Kimmel, P.D., Weygandt, J.J. & Kieso, D.E. (2016). Accounting Tools for Business Decision Making, 6th Edition, Hoboken, NJ: John Wiley & Sons, Inc.